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KIT Digital Will Restate All Earnings for the Past 14 Quarters

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It's sometimes hard to recognize a good customer, or so the small business truism goes, but in the case of KIT Digital it seems that revenues are almost impossible to recognize.

The company announced on November 21, just prior to market closing the day before Thanksgiving, that it will need to restate all earnings from the past three years due to revenue recognition irregularities. For those counting, that's fourteen quarters, as the first two quarters of 2012 are included.

StreamingMedia.com readers will remember our extensive KIT coverage from March and April, 2012, which occurred shortly after CEO and founder Kaleil Isaza Tuzman was removed as CEO and assumed the role of chairman. At the time, Barak Bar-Cohen, previously the company's chief administrative officer, moved into the CEO role.

Within just a few weeks, though, the board of directors moved to replace Tuzman in the chairman role, beefed up the financial executive team, and began the audit that was carried out over the past few months. The results of the audit lead to a staggering restatement of revenues.

In early November, in the aftermath of both the audit and hurricane Sandy, KIT Digital said it would delay the release of its 10-Q, filing an extension allowed by the Securities and Exchange Commission. Shareholders may be asking themselves how much was known at that point, as KIT chose to post news of the restatement on a slow news day when most of the country's attention was turned towards the long holiday weekend.

So what is the net result of the restatement? First, the company is telling shareholders to ignore fourteen quarters of earnings reports. Second, the company is suspending its annual shareholder meeting, set for December 5, 2012. Third, it's exploring options such as selling assets.

"As a result of the restatement of these prior periods," states a KIT Digital investor relations press release, "the Company will also restate the quarters ended March 31, 2012, and June 30, 2012. Accordingly, investors should no longer rely upon the Company's previously issued financial statements for these periods, any earnings releases or other communications relating to these periods, or projections or estimates for any future periods."

The company will again miss the extended 10-Q filling deadline, and it will not hold an earnings call, citing the irregularities as stemming from "revenue related to certain perpetual software license agreements entered into by the prior management team in 2010 and 2011."

The audit appears to lay the blame squarely at the feet of Tuzman, Bar-Cohen, and other previous management team members. Just a few months ago, Bar-Cohen was removed as CEO and the company brought in Peter Heiland as interim CEO, with Heiland taking responsibility for the overall management and direction of KIT Digital.

"The Company is considering a broad set of strategic alternatives," the press release notes, adding that financing transactions are potentially needed alongside an asset sale.

Tuzman has come out fighting, offering a significant premium on the current share price to those shareholders who might want to sell to him, denying wrongdoing, and blaming current management for the financial problems.

"[By your] emphasis on the dire current liquidity situation of the company," Tuzman said in a letter to the company's audit committee, "it appears to us that you, in conjunction with the company’s senior creditors, may be conspiring to artificially decrease the company’s stock price so as to acquire the company at a fire sale price that is unfair to shareholders.”

Going forward, financing will be a key issue, especially given the fact that KIT has less in cash and cash equivalents on hand than it does in secured and unsecured loans. It has about $4 million in restricted cash available, and an additional $6.5 million in cash and cash equivalents.

"The Company also has approximately $11.0 million outstanding under a secured loan facility and $2.5 million under an unsecured related party note," the press release states.

Yet those loan facilities are now in default, given that they appear to have been based on revenue goals. With the need to restate revenues sharply downward, KIT faces a significant threat to its ability to obtain financing.

"The Company is currently up to date with the principal and interest payments due under those loans," the press release states. "However, as a result of the restatement discussed above, there is an Event of Default under the secured loan facility and the Company is in discussions with the lenders."

The market reacted swiftly to the news, pushing KIT's stock price below $1 and shedding almost two-thirds of the company's value. Shares fell from above $2 per share on Wednesday, November 21, to $0.62 per share at the time of this writing.

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